Paid in company shares? Tax can arrive before you sell.
Stock options and restricted share units (RSUs) are common in tech and other high-paying jobs. Here is when they are taxed, in plain words.
How it works, in three steps
- 1Getting the shares is the taxable moment. For RSUs, the value of the shares when you receive them is generally taxed as employment income. For options, it is the share value when you exercise minus what you paid. Some private-company options can defer the tax until you sell.
- 2Some option benefits get a discount. Often half of an option benefit can be deducted, which taxes it like a capital gain. There is a cap on the deduction for options at large employers.
- 3After that, it is an ordinary investment. Your cost base is the value you were already taxed on. A later rise or fall is a capital gain or loss when you sell.
Keep your vest and exercise records. They set your cost base and stop the same value being taxed twice.
A simple example
RSUs vest when the shares are worth $20,000. That amount is employment income. At a 45% marginal rate it costs about $9,000 in tax.
Two years later you sell for $26,000. Your cost base is $20,000, so only the $6,000 rise is a capital gain, and half of it is taxable. The numbers are round figures for illustration.
Does this matter to me?
It matters most if you
- Get RSUs, options or an employee share plan
- Work for a public company, where shares are easy to sell
- Have vests or exercises that stack on top of a high salary
Watch out if
- Tax withheld at vesting can be lower than your real rate, so a bill may arrive at filing time
- Most of your wealth is in your employer's shares
- You hold US shares and have to convert to Canadian dollars on each date
The honest catches
- Plans differ. Timing and deductions depend on your plan and your employer, so read the plan terms and your T4 slip.
- Concentration is a risk. Tax is only part of it. Owning a lot of one company's shares is risky in itself.
- Foreign shares add steps. US shares involve currency conversion and sometimes foreign tax.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
Find the rate your next dollar is taxed at
Share income is added on top of your salary, so your marginal rate shows what a vest or exercise will cost.
Open the Marginal Tax Rate Calculator